Investors looking for a pull back are wondering if Tuesday's stock market weakness is the start of a quick sell off, but it may not be.
"The general feeling is everybody wants there to be a pull back. Everybody who has not jumped on board is not looking at this like it's over, and they want to short this market. Now they're looking for a pull back because they want to get in," said Marc Pado, U.S. market strategist and technical analysts at Cantor Fitzgerald.
The Dow fell 41, or 0.3 percent to 12,226, and the S&P fell 4 to 1328. Stocks reacted to weaker January retail sales, which came in below expectations, and a rise in import prices of 1.5 percent. Retail sales gained 0.3 percent.
Pado said he is watching the cumulative advance decline line, which hit a record high Monday of 119,782. In late August, it had been at 90,178. The higher number suggests market participants are buying a broad selection of stocks, not just focusing on a top tier.
"It's making new all time highs, above where it was when the Dow was at 14,500..It has a natural tendency to rise. When it diverges, it means money is going into fewer stocks, and that makes it a little bit of a caution. When breadth is confirming the trend, it means money is going into a broad range of stocks," he said.
Another positive trend is that the Russell 2000 is now outpacing the S&P, he said. "The big picture is that it's very positive confirmation that the market is going to head higher this year, but short term we're obviously seeing a heck of a run. The S&P up 13 percent since the last day of November. It's up 27 percent from the August low. We're talking about bull market moves in five months. You would expect the market to take a breather and there's nothing wrong with that. We've seen real resilience. We've shrugged off Egypt. We had one bad day," he said.
What to Watch
Investors will be watching producer price inflation and housing starts data Wednesday, both reported at 8:30 a.m. Industrial production is reported at 9:15 a.m., and the big event of the day could be minutes from the Fed's last meeting, released at 2 p.m. Traders will be watching that for any change in tone about the Fed's quantitative easing program, under which it is purchasing $600 billion in Treasury securities.
There are also earnings report from Abercrombie and Fitch , Deere , Genzyme , Owens Corning and Comcast , the parent of CNBC, before the opening bell.
J.P. Morgan economist Michael Feroli said he expects PPI of 0.4 percent on the core, and 1.1 percent on the core, when including food and energy.
He expects only slightly inflation this year. "Not a meaningful one (level)," he said. "Not the one that everyone's freaking out about. Core inflation is probably bottoming and it's going to gradually edge up..Maybe we get to one percent. We're not talking about hyperinflation."
After the bell earnings are expected from CBS , NetApp , and NVidia .
Treasury Secretary Tim Geithner testifies before both the Senate Finance committee at 10 a.m. and the House Budget Committee oat 2 p.m. on President Obama' s budget.
Bullish? or Too Bullish?
B of A Merrill Lynch Tuesday reported Tuesday that fund managers in its survey were more bullish on global equities than at any other time in the survey's 10 year history. Some 67 percent of asset allocators in its survey were bullish on global stocks in January. There was also a big swing between emerging markets and U.S. stocks, with investors moving to overweight U.S. equities as they moved out of emerging markets.
Merrill's chief global equity strategist does not necessarily see the swell of interest as a positive for stocks. "The surge in equity and commodity weightings, uber-low cash levels, rising inflation expectations and crashing EM allocations indicate that we are no longer in a Goldilocks environment," said Michael Harnett, chief global equity strategist at BofA Merrill Lynch Global Research.
"A jump in rates or weaker growth are the most likely catalysts for a spring correction," he said in a statement.
German Chancellor Angela Merkel's chief economic advisor Jens Weidmann is expected to be named president of the Bundesbank Wednesday, following Axel Weber's surprise resignation.
"I say it's pretty much a done deal that he gets in. I don't think it does anything for the euro right away," said Brown Brothers Harriman chief currency strategist Marc Chandler. He added the expected appointment also does nothing to illuminate who might run the European Central Bank when ECB President Jean Claude Trichet's term ends. Weber had been the frontrunner, but Weidmann does not have the experience.
"Bottom line, I don't think the next ECB president is going to be a German," said Chandler. Chandler said Italy's central bank governor Mario Draghi may be the latest favorite, but he is unlikely to get the position because the ECB vice president is from Portugal. ECB tradition is to balance power between the southern region of Europe and the North.
For that reason, Chandler said Finnish central bank governor Erkki Liikanen may be the most likely successor. French Finance Minister Christine Lagarde said Tuesday that Trichet's successor would not be based on nationality, but ability.
Chandler said if Weber were to have become ECB president, he doubts there would have been a euro zone rate hike this year. "Now that Weber's not going to be it, there's more of a chance of a rate hike this year," he said.
The euro moved lower against the dollar Tuesday and was at 1.3481 mid afternoon.
European finance ministers agreed on a European Stability Mechanism, a permanent plan for rescues that would replace the current bail out fund. But they also set extra meetings in an effort to reach a debt resolution deal before the end of March, when European Union leaders are expected to sign off on a package in Brussels.
Meanwhile, traders continue to watch peripheral sovereign debt. Chandler said the Portuguese benchmark was yielding 7.17 percent Tuesday.
He said that an associate studied the duration of Greek and Irish debt above the 7 percent level, and found that they each saw yields above 7 percent for 17 days running before they had to take aid. Portugal debt has been yielding over 7 percent for the past week.
"If your interest rate is above your growth rate, it's hard to stabilize. Portugal has been growing at less than 1 percent a year," he said.
Crude drifted lower, despite the continued protests in the Middle East, including in oil producer Iran. "I think oil traders are not so concerned with the spread of instability in the Middle East. I think if the protest had been more widespread and perhaps a little more violent in Iran maybe the oil price would have reacted more," said Addison Armstrong of Tradition Energy. "The citizens of Iran don't seem nearly as mobilized as they were back in 2009."
Shibley Telhami, the Anwar Sadat professor for Peace and Development at the University of Maryland, said he believes Iran is a very different situation than Egypt, where the regime's leader had no support from the Egyptian people.
"We really do know the regime certainly has opposition, strong opposition but they also have, in every single poll I've seen, they have strong grass roots support. I think it's unlikely that these demonstrations would bring the regime down," he said, adding that if they intensify, there may be counter protests.
There have also been protests in Yemen. "Yemen I think will continue in part because Yemen has really been in the middle of multiple civil wars, even aside from Al Qaeda and what it's doing there," he said.
Nymex crude Tuesday fell $0.49 per barrel to $84.32.
"I would say certainly when it comes to WTI (West Texas Intermediate) we are just swimming in crude here in the U.S., and the market was not able to hold crude above $92, and it retraced all the gains it made on the protests in Egypt, and now we've broken below that level. I would expect, given the fundamentals, oil prices would continue to trade down into the low 80s. The market is anticipating another increase in inventories when the government reports tomorrow and that's also weighing on the market," said Armstrong. The EIA reports oil inventories at 10:30 a.m.
He said Brent, which was down more than 1 percent but still trading above $101 per barrel late Tuesday, may be setting up for a move lower. "My idea on Brent is the spread is so wide and it's so overbought that it's not technically sustainable, and of course these kinds of trends can stay in place for a while, but it can correct and come back in," he said.
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